We appreciate our industry uses a lot of financial ‘jargon’, which can make it difficult to decipher information and correspondence. In order to try to assist with this, we have created a glossary of many of the terms you may come across. If you would like further clarification on any of the definitions, or cannot find a particular term, we would be happy to assist further.

Active Management
The traditional investment approach where fund managers actively build and change a portfolio of assets (e.g. stocks and shares) in order to take advantage of what they believe are the best opportunities.

Annual Allowance
The Annual Allowance is a limit to the amount of pension savings you can make, before you face a tax charge. You may be able to “carry forward” unused allowance from the last three tax years to increase your limit for the current year. Your annual allowance includes all the payments made into your pension by you, your employer, or any third party. It also includes most increases in benefits if you are an active member of a defined benefit scheme (also called final salary, or career average scheme).

An annuity guarantees to provide you with a regular income for the rest of your life, in return for you paying over a lump sum from your pension fund.

Asset Allocation
The proportion of investments in a fund or portfolio held in different asset classes such as equities, fixed interest and cash.

Asset Classes
The different types of assets available to investors. For example, equities, cash, fixed interest or property.

Base Rate
An interest rate set by the Bank of England which is used as a benchmark by UK lenders.

A tool with which to measure a fund’s performance – often a market Index or model portfolio.

This is someone who benefits from a will, trust, pension fund or a life assurance policy.

Loans to a government or company that pay you a fixed rate of interest.

Capital Gains Tax (CGT)
You make a ‘capital gain’ if you sell assets such as shares or property for more than they cost you. Each tax year you are allowed to make gains up to a certain amount without paying any tax.

Collective / Pooled Investments
Investments such as unit trusts, where a number of people put their money together to enable them to buy a wider range of investments, thereby spreading the risk of volatility.

Consumer Prices Index (CPI)
Measures the prices of a Fixed “basket of goods” bought by a typical consumer. Used as a measurement of inflation

Credit Rating
Formal evaluation of a company’s loan¬-repayment history and current ability to repay its financial liabilities. Awarded by agencies such as Standard & Poor’s and Moody’s. AAA grade is the highest.

Default Risk
This is the possibility that the issuer of a bond will be unable to make payments when they are due.

Defensive Stocks
Shares in companies whose business conditions are not particularly linked to the Business Cycle. They provide goods for which demand does not tend to be affected by Recession – utilities and basic food producers, for example.

Defined Benefit Pension Scheme
A company pension scheme where the pension an employee receives is linked to their length of scheme service and size of their salary as defined in the scheme rules. They are often referred to as final salary schemes.

Fall in the general level of prices of goods and services in the economy.

Deposit Account
A savings account from a bank or building society that pays interest on the amount of money held in it.

A payment made by a company to its shareholders. The size of the payment is usually determined by the size of the company’s profits, although a company does not have to pay a dividend at all.

Dividend Yield
The Dividend per share expressed as a percentage of the share’s market price.

A measure of the sensitivity of the price of a Bond to changes to interest rates. Similarly, the Duration of a Bond fund measures the sensitivity of all the Bonds in that fund to movements in interest rates. It is a widely used measure of how risky a Bond or a portfolio of Bonds is.

Emergency Fund
Cash set aside in a dedicated interest account to cover unanticipated financial emergencies such as property repairs, medical expenses and car repairs.

Also known as shares or stocks, these represent a share of the ownership of a company. Shares can provide regular payments, known as dividends, and share price changes as the value of the company changes.
Over the longer term, equities can offer greater growth potential than many other asset types. But the value of the equities can go up and down a lot and tend to carry a higher risk than corporate or government bonds or money market instruments.

When an annuity payment is automatically increased at regular intervals by a fixed percentage rate.

Assets owned by an individual at death.

Ethical Funds
These aim to make socially responsible investments (they do not invest in companies that have interests in socially unacceptable markets or produce harmful products or by-products, such as high levels of environmental pollution).

European Central Bank (ECB)
The central bank of the member countries of the Eurozone. It sets interest rates throughout the Eurozone.

Individual(s) who are appointed in a will to deal with the wishes of the deceased, in administering their estate.

Federal Reserve Board (Fed)
The US central bank.

Financial Conduct Authority (FCA)
The FCA is an independent body that regulates the financial services industry in the UK. The FCA has been given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives. In meeting these, they are also obliged to have regard to the Principles of Good Regulation. The 4 statutory objectives are:
• Market confidence – maintaining confidence in the UK financial system;
• Financial stability – contributing to the protection and enhancement of stability of the UK financial system;
• Consumer protection – securing the appropriate degree of protection for consumers; and
• The reduction of financial crime – reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.

Financial Services Compensation scheme
The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it.

Fiscal Policy
A government’s spending and taxation policy.

GDP (Gross Domestic Product)
A measure of the value of all goods and services produced in an economy in a year.

A bond issued by the British Government.

Guaranteed Annuity Rate
A guaranteed annuity rate guarantees that the annuity rate the provider offers will always be at a certain minimum level. If your pension includes a guaranteed annuity rate, it means you could get a higher income than normal.

Guarantee period (annuity)
This is the minimum number of years from the start of an annuity in which income will continue to be paid, even if the policyholder dies during that period.

A strategy employed in order to reduce or mitigate risk. Hedging involves making an offsetting transaction in one market in order to protect against possible losses in another. Currency hedging is a specific example of hedging where the fund manager tries to protect an existing or anticipated position from an unwanted move in exchange rates.

High Yield Bond
This is a bond that generally has a low (or “non¬-investment grade”) credit rating and which offers higher interest payments than a bond with a higher credit rating due to the increased risk of default by the company issuing the bond. It can also be known as a “junk” bond.

An example of the potential growth you may expect to receive from an investment. The growth rates used are set by the industry regulator, the Financial Conduct Authority (FCA). It is important to remember that the actual return received could be higher or lower than that shown on the illustration.

Money received by an individual for example as a salary or from investments which is usually subject to income tax. Cash deposits and bonds will provide income in the form of interest. Most shares will provide income in the form of dividends.

Income Drawdown
Enables people with a certain type of pension to draw an income and/or cash lump sums from their pension fund, rather than buying an annuity and to take income direct from their pension fund.

In the stock market, an index is a device that measures changes in the prices of a basket of shares, and represents the changes using a single figure. The purpose is to give investors an easy way to see the general direction of shares in the index. Examples of stock market indices are the FTSE 100, FTSE All-Share, Nikkei and Dow Jones.

Index Fund
A fund that is managed so as to generate the same returns as a specified Index (also known as “Passive” or “Tracker” funds).

Inheritance Tax (IHT)
Inheritance Tax is paid if a person’s estate (their property, money and possessions) is worth more than a certain amount when they die. This is called the ‘Inheritance Tax threshold’.

ISA (Individual Savings Account)
A savings vehicle that allows customers to invest in equities, (stocks and shares) or save cash without having to pay any income or capital gains tax.

Joint-Life Annuity
An annuity that pays you a regular income for life and then when you die usually pays your dependant a regular income for life too.

Lasting Power of Attorney (LPA)
A lasting power of attorney (LPA), is a legal document that allows you to appointment someone (the ‘Attorney’) to make decisions for you. Importantly, an LPA can still be used even if the ‘donor’ loses mental capacity.

Life Assurance
An assurance policy that pays out a lump sum or instalments on the death of the life assured.

This is how quickly an asset, such as equities, corporate bonds or property, can be traded within a market and turned into cash.

Listed Company
A company that satisfies the listings rules of a stock exchange, and whose shares are quoted and traded on a stock exchange.

Monetary Policy
A way of influencing the economy by controlling the availability and cost of money (mainly through changing interest rates).

PAYE (Pay As You Earn)
HM Revenue & Customs’ system for collecting income tax from the pay of employees as they earn it.

Personal Allowance
The Personal Allowance is the amount of income you can earn before paying tax.

Potentially Exempt Transfer
Gifts on which inheritance tax will not be payable unless the donor dies within seven years.

Real Return
The Return from an investment adjusted to take into account the effect of inflation.

A fall in economic activity. Technically, for an economy to be in Recession, it must have endured two successive quarters of falling GDP.

Retail Prices Index (RPI)
A monthly indication of the average price changes to a particular ‘basket’ of consumer goods, and used as a general indicator of price inflation.

Small Gifts Allowance
An annual inheritance tax (IHT) allowance, enabling a donor to give up to £250 per year to any number of separate individuals (donees).

State Pension Age
The State Pension Age is the date when you are eligible to receive a State Pension.

Sum Assured
The guaranteed amount paid on death under a life assurance policy. Depending on the policy held, this sum might be increased through the addition of bonuses.

Tax Year
A period of time used for tax calculations. In the UK this starts on 6 April each year and finishes on 5 April the following year.

An arrangement whereby one person or persons (trustees) agree to take care of assets and to use those assets in particular ways for particular people (beneficiaries).

A person appointed to manage and safeguard the assets of a trust.

A measure of how much an investment’s price is likely to fluctuate during a set period of time.

A document drawn up to administer an estate on death.